September quarter earnings to tick up; consumption demand returns

The analysis is based on 360 companies, excluding financials and oil companies, which account for around 46% of the market capitalisation of the National Stock Exchange (NSE). Photo: Aniruddha Chowdhury/Mint

Mumbai: The September quarter corporate report cards are likely to show a continued recovery in earnings, albeit on a low base, but improving consumption—a sign that was not visible earlier, leads to a ray of hope that the long-awaited good times may now be on the horizon.

Crisil Research expects revenues of companies in key sectors—excluding banking, financial services and insurance companies (BFSI) and oil companies—to rise 7% in the second quarter of the current fiscal from a year before, and this would be their second-best show in six quarters.

The analysis is based on 360 companies, excluding financials and oil companies, which account for around 46% of the market capitalization of the National Stock Exchange (NSE).

The research arm of Crisil Ltd attributed the boost in revenues to the low-base effect (revenue growth in the corresponding quarter last fiscal was stagnant), improvement in urban and rural consumption, and low commodity prices, and added that operating margin is seen expanding by 50 basis points (bps). One basis point is one-hundredth of a percentage point.

“In the second quarter, we expect sectors focused on urban and rural consumption such as automobiles and retail, along with pharmaceuticals and IT services, to record double-digit revenue growth,” said Prasad Koparkar, senior director, corporate ratings at Crisil Ltd.

A good monsoon after two successive years of drought, coupled with implementation of the 7th Pay Commission, is set to boost rural consumption.

Southwest monsoon season in Asia’s third-largest economy ended with rainfall that was almost normal at 97%, leading to record sowing and filling of reservoirs with sufficient water after two years of drought. India recorded a rainfall deficit of 14% and 12% in 2015 and 2014, respectively.

Ambit Capital shared the thought on the recovery in consumption cycle. In a report dated 7 October, it said that its analysis of high frequency indicators showed that consumption as a theme continues to do well while investment remains under pressure.

“In the short-term, we expect higher agricultural sector growth in 2HFY17 and award of the 7th Pay Commission to propel a U-shaped consumption driven pick up in GDP growth,” Ambit analysts said in a note.

Kotak Insitutional Equities, an arm of Kotak Securities Ltd., sees net profit of the Sensex growing by 4% from a year before in the September quarter, and net sales are seen rising by 3.7%. In the June quarter, net profit for Sensex companies grew by a mere 0.99%, while net sales edged up 1.5% higher.

It expects year-on-year growth in net income of automobile, cement, consumer products and industrials sectors, while it sees banking sector dragging overall earnings due to high provisions for bad loans.

Even as banking sector is likely to play a spoilsport, cyclicals are seen dominating the earnings in the quarter ended September.

According to Motilal Oswal Financial Services Ltd, the second quarter of fiscal year 2017 marks a recovery in earnings, with multi-quarter high growth of 12% for the brokerage firm’s coverage universe. The brokerage sees the companies posting positive sales growth after nearly two years.

The key takeaway, according to Motilal Oswal, is that interestingly, cyclicals will take up the baton from defensives to drive earnings in the September quarter and the second half of fiscal year 2017. It added it expects a shift in earnings drivers, with the share of domestic cyclicals in earnings expected to hit a 30-quarter high of 40%.

“Momentum in auto volumes have picked-up, whereas Cement is into its 1st year of upcycle. All these will increase share of cyclicals in the earnings of the Corporate India,” Motilal Oswal analysts said in the note.